Monday, December 31, 2007

Deloitte: M&A 2008 - Strategics and more

Corporate Dealmaker Forum, Deceber 28, 2007:
Alan Alpert, a senior partner and leader of the global and U.S. M&A transaction services practices for Deloitte, has given CD Forum a quick-hit list of trends he's seeing for the New Year. David Carney, a principal with Deloitte Consulting LLP, also contributed to the list.
With corporate cash balances at their highest levels since 1985, strategic buyers have a near term market advantage. Savvy buyers with clear strategic growth objectives should be able to capitalize on shifting market dynamics driven from the credit crunch and general economic uncertainty, including less competition from PEIs and the need to bolster balance sheets or merge in competitive segments.
Stagnating capital deployment from the war chests that PEIs have amassed in recent years doesn't mean PEIs will sit idle on the sidelines while credit markets remain tight. Funds are looking for alternate transaction scenarios outside their typical space, such as portfolio company add-ons, smaller deals, bigger equity checks, private investments in public entities (PIPEs), joint ventures and/or minority stakes. With near-term exit strategies potentially impacted by economic uncertainty, some PEIs are focusing on improving portfolio companies’ performance and reevaluating debt loads on highly leveraged companies.
The emergence of new sources of capital and currency movements has created a new playing field for cross-border investment. Outbound activity from China and Japan is on the rise; PEI expansion into central eastern Europe is providing opportunities for larger equity stakes; and the BRIC nations are becoming a larger force in the world economy and deal making—with growing inbound and outbound activity. U.S. companies and assets hold particular appeal for foreign investors wanting to diversify their investment portfolios, and the role of sovereign wealth funds can't be ignored as they emerge more frequently at the deal table and potentially look to partner with PEIs or take controlling stakes.
Interest in infrastructure has crossed the pond into to the U.S. With an ageing infrastructure and increasing number of U.S. municipalities looking to monetize public assets, the U.S. is a greenfield opportunity for infrastructure deals. Despite the potential regulatory and political hurdles inherent in these transactions, more experienced offshore investors/operators and newly raised U.S. infrastructure funds are bidding on U.S. assets and bringing alternative investment structures and vehicles to the market.
In the wake of the deal boom, companies will need to reconsider the strategies driving previous mergers and acquisitions and whether transactions will realize expected synergies. Companies need to take a candid self assessment on their deals and take a "Day 2" approach to reignite and accelerate synergies or consider alternate means to create value.

Friday, December 28, 2007

M&A Ends 2007 With a Bang

Deal Journal,, December 28, 2007:
Reports of the M&A market’s demise may have been greatly exaggerated.
Much has been made of the slowdown in deal making and the toll the credit crunch is taking on M&A, especially on leveraged buyouts. That perhaps has overshadowed this simple fact: The biggest deal making year in history is ending quite strongly. In fact, deal making continues to chug along at levels not often seen before.
Companies and private-equity firms struck $1.093 trillion worth of transactions in the fourth quarter, according to Dealogic. That would rank it as the second biggest quarter this year and the third largest quarter in the past 12. Even if you subtract BHP Billiton’s $149.2 billion offer for Rio Tinto, that figure stands at about $944 billion and ranks ahead of six quarters since the beginning of 2005.
December marked the third straight month to top $300 billion in deal volume, according to Dealogic.
Even the U.S., which was hardest hit by the credit crunch, began to show signs of coming to life in December. Led by sovereign wealth funds scooping up stakes in U.S. financial institutions, foreign buyers increasingly found the U.S. attractive.
U.S. deal volume hit $121 billion in the month, surpassing $100 billion for the first time since July, and down just 8.4% from December 2006, according to Dealogic. Meanwhile, acquisitions of U.S. firms by foreign buyers surged to $107.8 billion in the fourth quarter — the largest quarterly total in the past 12.
With private-equity players still on the sideline, corporate buyers are indeed filling the void. Not only did corporate deal volume reach $955 billion in the fourth quarter, its second highest level of the year (the second quarter, which marked the peak of the boom, ranks higher). It also accounted for 87% of all deal volume – its largest percentage of the past four quarters.

Friday, December 21, 2007

Judge Rules Against United Rentals in Deal Lawsuit

A Delaware judge ruled Friday that Cerberus Capital Management could not be forced to complete its $4 billion deal for United Rentals, a rental equipment operator.
After a two-day trial this week, William B. Chandler III of Delaware’s Court of Chancery said that the private equity firm need only pay a $100 million breakup fee, as stipulated in the deal agreement. United Rentals had argued that Cerberus could not unilaterally break off the deal.
“URI knew or should have known what Cerberus’ understanding of the merger agreement was,'’ Judge Chandler wrote in his ruling.
In a statement, Cerberus said:
We are gratified that Chancellor Chandler has ruled in favor of the Cerberus affiliates. The decision validates the Cerberus affiliates’ specifically negotiated ability to refrain from proceeding with the proposed transaction. The decision not to proceed was reached only after a great deal of deliberation and only after exploring all available alternatives. We regret the negative comments that were directed at us by URI, and are pleased that the court chose to decide the case on the merits and confirm that Cerberus acted in accordance with its rights and obligations.
Shares in United Rentals fell 17 percent Friday afternoon, closing at $17.91.
Go to Article from Bloomberg News »

Kicking the Poison-Pill Habit

Corporate governance groups might want to raise a toast this New Year’s: It seems they are making headway in pushing public companies toward shareholder-friendly reforms. At least, that’s what a recent study from law firm Shearman & Sterling suggests.
The firm’s fifth annual “Corporate Governance Survey” of the 100 biggest U.S. public companies found big declines in recent years in the number that have “poison pills,” which make hostile takeovers prohibitively expensive for acquirers, and classified boards, which make it difficult for an acquirer to shake up a company’s board of directors.
Just 17 of the 100 companies had poison pills in place in 2007, almost half the number in 2004, and only 33 of the companies in this year’s survey had classified boards, a nearly 40 percent decrease from 2004.
But the news from the corporate governance front was not all positive, as Jeff Nash of Financial Week reports. A study released earlier this week by Corporate Library’s researchers found that executive pay continued its steady climb in 2007. Mr. Nash noted that compensation for chief executives at S&P 500 companies increased by 23 percent in 2007, bringing the new median pay up to more than $8.8 million.
Go to Summary of Shearman & Sterling Survey »
Go to Article from FinancialWeek »

U.S. mergers hit new record, but lag Europe

PHILADELPHIA: Merger volume hit a record $1.57 trillion (786 million pounds) in the United States in 2007, according to research firm Thomson Financial, despite a sharp decline in dealmaking at mid-year when credit markets tightened and mergers became more costly to finance.
Globally, mergers totalled a record $4.38 trillion in 2007, up 21 percent from 2006, while U.S. volume rose 5.5 percent to $1.57 trillion, according to preliminary figures released by Thomson late on Wednesday. For the first time in five years, the U.S. lagged dealmaking in Europe, where mergers totalled $1.78 trillion.
The bulk of the U.S. merger volume in the first half of the year was fuelled by easily obtained debt financing that helped private equity firms and other buyers borrow large amounts of money at attractive rates.

Wednesday, December 12, 2007

M&A forecasters on 2008: Middle market and cross-border deals

Corporate Dealmaker Forum, Decemeber 12, 2007:
'Tis the season for predictions, and we've just received two sets from two different M&A market participants. Middle-market investment bank Harris Williams & Co. expects: PE megadeals will continue to be on hold; valuations will ease somewhat; more cross-border activity, including foreigners shopping in the U.S.; and opportunities for strategic buyers.
PricewaterhouseCoopers' Transaction Services is on a similar wavelength, adding that international buyers are already busy acquiring U.S. targets. For the first 11 months of 2007, cross-border deal value was $354 billion, PwC says, representing 23% of the U.S. total, a 73% increase from the annual 2006 cross-border deal value of $204 billion. PwC's Bob Filek also sees a possible rebound for leveraged lending, and with it, some PE activity. “The core fundamentals of corporate borrowings on the leverage market are solid relative to historical standards. Leveraged lending caught a cold from the subprime mortgage market,” says Filek. — Kenneth Klee
See other Harris Williams M&S trend reports
More trends and analysis from PwC

Sallie Mae’s Buyers Walk Away from the Table

So long, Sallie.
The SLM Corporation, the big student lender known as Sallie Mae, said Wednesday that its offer to craft an “alternative transaction” with a group led by J.C. Flowers & Company had been rebuffed — an announcement that seemed to erase any hope that its embattled $25 billion buyout deal could be renegotiated. In a press release, SLM said the would-be buyer “does not wish to pursue” an opportunity to submit a new bid and indicated that it will “pursue all available recourse, including the company’s existing lawsuit against the buyer’s group.”
Shares of SLM fell nearly 10 percent after the statement was released. At $27.73, they were at their lowest level in at least five years, after adjusting for stock splits.
Sallie Mae and the bidding consortium, which also includes J.P. Morgan Chase and the Bank of America, have been feuding for months about whether the buyers can walk away from the deal without paying a $900 million termination fee. At the heart of the dispute is recently passed legislation that would hurt Sallie Mae’s business.
There is already a suit pending in Delaware’s Court of Chancery, with a tentative trial date in July.
Go to Press Release from SLM via PRNewswire »

Monday, December 10, 2007

Deal for Myers won't close as scheduled

Crain's Cleveland Business is reporting today that "the acquisition of Myers Industries Inc. (NYSE: MYE) for $22.50 a share by an affiliate of Goldman Sachs will not close by the end of this week as originally planned, if the deal ever is completed at all.
The Akron-based manufacturing and distribution company said the Goldman Sachs affiliate, GS Capital Partners, has requested more time to complete the acquisition of Myers. However, as part of the agreement to extend the closing deadline to April 30, 2008, from Dec. 15, 2007, Myers is free to respond to takeover proposals solicited or received from other parties during the extension period and will not be required to pay a termination fee to GS Capital Partners if it enters into an alternative transaction.The announcement caused the stock of Myers to plunge from the outset of trading today, and it has not improved throughout the session. Shortly after 1 p.m., Myers was trading for around $15.70 a share, down 27% from its Friday close of $21.56.In consideration for extending the closing date of the transaction, GS Capital Partners has agreed to make a non-refundable payment to Myers of a previously agreed upon $35 million fee. Myers said GS Capital Partners also has secured an extension of its debt financing commitments from Goldman Sachs Credit Partners and Key Bank, under which GS Capital Partners has agreed to contribute another $30 million of equity to the transaction.Myers said GS Capital has acknowledged that there has been no material adverse change in Myers’ business, and the deadline extension request “resulted from its desire to further evaluate conditions in certain industries in which Myers operates.”John C. Orr, Myers president and CEO, said in a statement: “Both sides continue to work closely to complete this transaction. In light of GSCP’s request for an extension, which we received the evening of Dec. 7, 2007, the board of directors determined that it is in the best interest of Myers’ shareholders to preserve this opportunity.” On Nov. 30, Myers made an exception to its policy of not responding to market rumors when it addressed rumors that its acquisition by GS Capital Partners would not close as scheduled. Myers said at the time it had not received any indication from its would-be acquirer that it did not intend to close the transaction within the time frame provided by their merger agreement.Myers in late April announced it had reached a definitive agreement to be acquired by GS Capital for $1.1 billion, including the assumption of certain debt. However, turmoil in the credit markets has caused some market observers to question whether the transaction will happen.In early November, Myers reported a sharp drop in third-quarter earnings despite a double-digit increase in sales. The company said net income in the period fell 75%, to $1.5 million, or four cents a share, from $6.1 million, or 17 cents a share.Myers said results in the latest third quarter were hurt by restructuring expenses, foreign currency transaction losses and expenses related to two acquisitions that were completed early this year. Myers also saw softness in several end markets and encountered increased resin prices.

Are PE Firms Finding It Harder to Exit?

Deal Journal -, December 10, 2007, 10:13 am
Are PE Firms Finding It Harder to Exit?
Posted by Stephen Grocer
Saying goodbye seems to be getting more difficult these days.
It has been well documented here at Deal Journal — as well as most other financial publication — that the past four months have been a trying time for private-equity firms to make acquisitions. The data also suggest firms are finding it harder to exit the businesses they do buy.
World-wide volume for two private-equity exit strategies — secondary buyouts and trade sales — have been depressed the past four months, according to Dealogic. Secondary buyouts are the sale of a PE portfolio company to another buyout shop; trade sales occur when a private-equity firm sells a company it owns to another company in the same field. (And for those wondering about IPOs, The Wall Street Journal pointed out a few weeks ago that the IPO market may be becoming less hospitable to private-equity firms.)
Granted, this isn’t all that surprising. After all, the turmoil in the credit markets has hampered buyout firms from making acquisitions and whether it is a PE firm or company on the selling side wouldn’t affect that. Still, it is interesting to note the correlation.
For both global private-equity deal and exit volumes, each of the past four months rank among the five lowest monthly totals of the year, according to Dealogic. November’s exit volume from secondary buyouts and trade sales was the lowest of the year at $13.2 billion, down almost 75% from the high of July. The last month to witness lower volume from secondary buyouts and trade sales was September 2006.
Four months did come in lower than November in terms of world-wide private-equity deal volume, though November buyout volume was down 83% from its peak in May.

Friday, December 07, 2007

Congress Moves Toward Agreement on Blocking U.S. Minimum Tax

Dec. 7 (Bloomberg) -- Congress moved closer to protecting 23 million households from the alternative minimum tax as Senate Democrats dropped a demand to link it to a tax increase on executives at private equity firms and hedge funds.
The Senate approved a one-year, stop-gap measure that temporarily indexes the minimum tax for inflation, sparing 23 million American households from an average tax increase of $2,000 this year.
The 88-5 vote puts pressure on the House to abandon its own legislation that links the minimum tax relief, aimed at middle- class families, to higher taxes on executives of hedge funds, buyout firms, as well as real estate and other partnerships.
Senate Majority Leader Harry Reid said House Democrats would accept the Senate action. Minutes later, House Ways and Means Chairman Charles Rangel, a New York Democrat, issued a statement saying he would try to alter the Senate measure to close a tax loophole that allows hedge fund managers to defer taxes on money in offshore accounts.
``The House will consider these amendments so that we may give the Senate another chance to do the right thing and pass responsible AMT relief,'' Rangel said.
Rangel earlier yesterday said he wouldn't oppose removing a provision that would boost the tax on so-called carried interest, the performance fees that managers of private equity firms, hedge funds and some real estate and oil and gas partnerships earn.

In Deal Opinions, Independence Takes a Back Seat, Dealbook, December 7, 2007
According to a recent study by Thomson Financial, only 12 percent of deals in which there was a fairness opinion involved an “independent” firm, as opposed to an investment bank that was getting other fees as part of the transaction. It’s a notable statistic, especially when juxtaposed with this one: Nearly three-fourths of the portfolio managers and analysts surveyed by Thomson said they favored using an independent firm for fairness opinions.
Fairness opinions have long been the subject of hand-wringing on Wall Street.
Companies involved in mergers often order up these opinions, but the harsh truth is that they are widely seen as a way to ward off future lawsuits — and not earnest requests for financial analysis.
In general, the firm that draws up the fairness opinion is an investment bank that already has skin in the game. This may be because the bank will get a big advisory fee (much bigger than the fee for the fairness opinion) if the merger is completed. Or it may be because it is also offering financing to the buyer, known as staple financing.
It may come as no surprise that these banks generally find that the proposed deal is, indeed, fair.
Marc Wolinsky, a partner at Wachtell Lipton Rosen & Katz, offered this unusually frank assessment in October: “A fairness opinion, you know — it’s the Lucy sitting in the box: ‘Fairness Opinions, 5 cents.’” (We would note that, for deals valued at more than $5 billion, the median fee for a fairness opinion these days is more like $1.8 million, according to Thomson.)
It is easy to frame the problem, but solutions aren’t so easy to find. Jeff Block, who wrote Thomson’s recent report on fairness opinions, points out that while independence may sound nice, even independent firms depend on referrals and repeat business.
If an independent firm has a reputation for not telling the board what it wants to hear, that firm may quickly find that its phone stops ringing.
Consider this cynical comment from an unnamed buyside equity analyst who took part in Thomson’s survey. Asked if companies should hire an independent third party to render an additional fairness opinion, the analyst said: “It would not introduce additional integrity into an already flawed process. It would only add to the number of pigs feeding at the trough.”
Go to Previous Item from DealBook »

Tuesday, December 04, 2007

RiskMetrics Group’s 2008 Board Practices Study

Submitted by: Sarah Cohn, Marketing and Communications
RiskMetrics Group is pleased to present its 2008 Board Practices Study. Some of the key findings from the study revealed:
1) Board independence levels rose to 74 percent in 2007 after having leveled off at 72 percent in 2006 (the first year no increase at all was found from the prior year’s levels).
2) 45 percent of major U.S. companies had separated the posts of chairman and CEO at the time of their most recent shareholder meeting—an increase of 20 percentage points since 2000, and four percentage points over the previous year.
3) The number of companies with staggered boards continued to decline in 2007, to 52 percent overall, down from 55 percent in 2006.
To learn more about the findings from the study, please tune into the Board Practices interview with Carol Bowie of RiskMetrics Group’s Governance Institute, and Patrick McGurn, special counsel at RiskMetrics Group. To access the study, please visit here.

Investors See End to Buyout Boom, Survey Says

How do limited partners feel about the recent shifts in the buyout landscape? More than a bit gloomy, according to a new survey by Coller Capital, which found that most institutional investors think the private equity boom is over, with North America likely to feel the pain most acutely.
The results of the survey, which polled more than 100 limited partners that invest in private equity funds, are hardly surprising given the turmoil in the credit markets, which has made private equity deals much harder and much more expensive.
The survey did produce at least one optimistic finding. Ninety-six percent of the respondents said they plan to increase their private equity investments, and 78 percent plan to increase their relationships with private equity fund managers. Evidently, these investors don’t see any better options for generating high returns on their money.
The private equity boom may be over, but it seems few alternatives have arisen to fill its place.
Go to Press Release from Coller Capital »

Friday, November 30, 2007

Nov M&A slumps in United States

NEW YORK (Reuters) - The value of announced U.S. mergers and acquisitions fell 71 percent in November to $58.1 billion when compared to the same month last year, according to research firm Dealogic.
In November of 2006, M&A had reached $200 billion.
As lending markets remained tight and investment banks absorbed the fallout from mortgage losses, the M&A slowdown in the United States that started in August showed few signs of reversing course this month.
Dealogic said the second-half slump in U.S. mergers has reduced the year-on-year increase in U.S. deal volume to 7 percent, with $1.5 trillion of announced transactions compared to $1.4 trillion at this stage of 2006.
Abu Dhabi Investment Authority's $7.5 billion deal for a stake of up to 4.9 percent in Citigroup (C.N: Quote, Profile, Research) was the largest announced U.S. deal in November, Dealogic said.
Of the 10 largest U.S. deals announced this month, five involved foreign buyers and for 2007 year to date, 21 percent of all U.S. deals were announced by non-U.S. buyers, led by Britain with $45.7 billion of transactions and Canada with $39.5 billion.
Leveraged buyouts involving private equity firms, which had helped take M&A to record levels, declined dramatically in size and volume in November.
"Private equity buyers continue to fade from view with just $25.8 billion announced financial sponsor buyouts globally and a mere $2.3 billion for U.S. targets - the lowest monthly volume since March 2002," said Dealogic in a report.
Globally, the average value of private equity deals has gone down from $1 billion at its peak in May to $325 million in November. In the United States, the average private equity deal was $2.6 billion in May and $127 million in November.
Thanks to the mergers boom in the first half of the year, global M&A for 2007 has reached a record $4.5 trillion year to date, up 28 percent on this stage of 2006.
Dealogic said Goldman Sachs (GS.N: Quote, Profile, Research) leads the 2007 global M&A advisory rankings with $1.3 trillion of announced deals, with Morgan Stanley (MS.N: Quote, Profile, Research) close behind with $1.2 trillion and JP Morgan (JPM.N: Quote, Profile, Research) third with $1 trillion.
The advisory rankings in the United States mirror the global top two, but Citigroup (C.N: Quote, Profile, Research) is currently in third place.
Dealogic said this is the first time that Morgan Stanley, JP Morgan and Citigroup have gone over the $1 trillion mark in the M&A league table.
(Reporting by Mark McSherry; Editing by Gary Hill)

Wednesday, November 28, 2007

Red, White & Blue Plate Special: Foreign M&A Surges in U.S.

November 27, 2007, 3:59 pm
Posted by Dana Cimilluca, Deal Journal -
The Redcoats are coming — again.
The weapon of choice in this British invasion, however, is money, not muskets, and the targets are companies, not rebels. U.K. companies have struck $46 billion of acquisition deals in the U.S. this year, more than any other country, according to Dealogic. That compares with just $34 billion in all of last year (when our former parent country ranked third after Canada and France.)
The Brits aren’t alone this year, however. Since the global merger boom began in around 2003, there has been a steady increase in the percentage of U.S. acquisitions made by foreign companies. Their share of such deals has increased to 20%, from 11% then, according to Dealogic. Even as the M&A engine in the U.S. sputters along with instability in the credit markets, foreigners keep snapping up U.S. assets, as highlighted by the Abu Dhabi Investment Authority’s surprise $7.5 billion investment in Citigroup.
What draws these overseas neighbors to our shores? The overflowing coffers of the state investment funds in countries including China and Abu Dhabi are part of it. The sharp decline in the U.S. dollar can’t hurt either, as it reduces the cost of U.S. deals for acquirers using euros, pounds or yuan.
Of course, given the fickle nature of the U.S. dollar and oil prices — whose marked movements have helped shift the M&A landscape — there is no guarantee they are here to stay. After all, in 2000, foreign deals accounted for 22% of all U.S. M&A, only to fall to 11% three years later as the tech bubble sent foreigners scurrying like the British after Yorktown.

A November M&A Recovery? Appearances Are Deceiving

November 28, 2007, 7:30 am
Posted by Stephen Grocer, Deal Journal -
As the months tick by since the credit crunch hit, one thing is clear — U.S. deal makers are left wondering where the party is.
With three days left in November, deal volume in the U.S. is down for a third straight month from a year earlier. Meanwhile, Europe and Asia both registered a jump in M&A activity.
All told, companies and private-equity firms announced $435.3 billion of acquisitions world-wide through Nov. 27, a 23% increase from the year-earlier period and up almost 45% from October, according to Dealogic. But let’s not crack open the champagne just yet.
While at first glance it would seem that the defibrillator paddles can be taken off the global M&A market, a closer look reveals that the outlook for deal making might not be so rosy. The reason? One deal –- BHP Billiton’s offer for Rio Tinto, which Dealogic values at $149.2 billion –- accounts for nearly a third of world-wide deal volume. Subtract that from the total, and November’s total represents a 5% decrease from October’s total, according to Dealogic. (Though with three days left in the month, November could close the gap.)
Compare that with April. Deal volume reached $599.3 billion that month, thanks in no small part to the Royal Bank of Scotland-led consortium’s $96.6 billion offer for ABN Amro. Subtract the ABN deal from the monthly total and you still have more than $500 billion in announced deals, and only two months in the past 12 would rank ahead of April.
Still, at $286.1 billion, November’s deal volume total would mark a healthy uptick from August and September.
Weighing down the global M&A market is the U.S., historically its main engine. In fact, there was little good news in November’s numbers for U.S. deal makers.
U.S. deal volume slid 73% from a year earlier to $51.1 billion, meaning that after hitting $84.1 billion in October, it has fallen back to the lows of August and September, according to the data. A sizable chunk –- about 37% — of that came from buyers outside the U.S. In a sign of the times, the United Arab Emirates, in terms of dollar value, led the way in November among foreign buyers of U.S. assets, with two deals valued at $8.1 billion.
And there is little hope that a recovery is around the corner. The credit markets, which just weeks ago seemed to be on the road to recovery, have weakened again. (Witness the postponed sale of loans related to the Chrysler buyout.) Talk of recession, which is hammering the stock market, may mean that companies won’t be in a buying mood this holiday season and beyond. And let us not forget the beating Wall Street’s banks are taking at the hands of the U.S.’s subprime-mortgage-related woes. It is unlikely they will return to a giving mood until after the subprime mess clears up.
Meanwhile, European deal makers have plenty to celebrate. European deal volume jumped 245% from a year earlier to $308.2 billion in November, according to Dealogic. That also marks the single largest monthly total of the past 20 months. And even if you subtract BHP’s offer for Rio Tinto, European deal making still jumped 78%.

Monday, November 19, 2007

United Rentals Sues Cerberus Over Failed Deal

Another collapsed buyout has hit a court’s docket.
United Rentals sued Cerberus Capital Management on Monday over the private equity firm’s cancellation of a $4 billion buyout of the company. The lawsuit, filed in Delaware’s Court of Chancery, seeks to force Cerberus to complete the deal and could test the use of breakup fees as a way to cancel merger agreements.
“United Rentals believes that the repudiation, which is unwarranted and incompatible with the covenants of the merger agreement, is nothing more than a naked ploy to extract a lower price at the expense of United Rentals’ shareholders,” United Rentals said in its statement. (Download the complaint below.)
United Rentals has now joined SLM, the parent of student lender Sallie Mae, and Genesco, a footwear company, in the plaintiff’s corner as they try to win legal relief amid their failed deals. Concerns over the credit market have played a major role in the demise of several deals, leaving the courts to sort through the mess.
Last week, Cerberus declared that it would walk away from the deal it struck in July. Oddly enough, it said it was not declaring a material adverse change in the rental equipment provider, a magic legal phrase that would let it end the deal without penalty. Instead, Cerberus said it would pay the $100 million breakup fee.
In its announcement Monday, United Rentals said that it had held a meeting last week with Cerberus’s chief executive, Stephen A. Feinberg. At that meeting, Mr. Feinberg told the company that his firm did not want to force its banks to fulfill their commitments. The private equity firm also confirmed that there was no adverse change.
United Rentals is arguing that Cerberus cannot claim financing difficulties, as it already has commitment letters from banks in hand. The company also says that a “specific performance” provision of the merger agreement requires the private equity firm to use that financing. Otherwise, it said, “irreparable damage would take place.”
It also argues that Cerberus is trying to buy the company on the cheap, thanks to the 32 percent stock price drop that transpired after last week’s news that the deal was faltering.

If Buyout Firms Are So Smart, Why Are They So Wrong?

Published: November 18, 2007, New York Times

ENOUGH already.
Private equity firms have recently been reneging on their billion-dollar buyouts as if the deals came with a 30-day money-back guarantee. They don’t. But that hasn’t stopped the biggest firms from trying to bully — yes, let’s finally call it what it is — their way out of deals.
For the last few months, private equity firms have repeatedly broken their word when breaking a deal, trying to place blame on big, bad investment banks that they said were holding them hostage by threatening to withdraw financing.
It was an easy narrative to follow, but it obscured the truth: Private equity firms, widely hailed as the “smart money,” made some lousy deals in the second half of this year, and some are now having a bad case of buyer’s remorse. They have been more than happy to break the deals and let the banks be the fall guys.
To be fair, the banks cut some pretty lousy deals themselves and have been applying pressure to their clients. But if you have spent time with buyout bosses, you know it’s hard to pressure them into doing something they don’t want to do in the first place.
Witness the latest broken deal: Cerberus Capital Management, run by Stephen A. Feinberg, the powerful but intensely private financier, refused to complete its $4 billion acquisition of United Rentals unless the price was renegotiated downward. Cerberus didn’t even try to claim that United Rentals had suffered a “material adverse change” — the magic words that usually permit a buyer to walk away without a financial penalty — or that the banks were preventing it from completing the transaction.
Cerberus provided no explanation other than that it was willing to forfeit its $100 million reverse breakup fee to walk away. In a letter seeking its corporate divorce, Cerberus said simply that “after giving the matter careful consideration,” it was “not prepared to proceed with the acquisition of URI on the terms contemplated by the agreement.”
What? Yes, Cerberus just proved itself to be the ultimate flighty, hot-tempered partner.
“Any target dealing with them in the future would now be irresponsible to agree to a reverse termination provision,” Steven M. Davidoff, a law professor at Wayne State University in Detroit, wrote of Cerberus on his blog.
And what about reputational damage? It has again been brushed aside as a non-issue: apparently all is fair in love, war and private equity.
Everyone repeats the same line: “There’s no question that this summer the world changed,” Leon Black, founder of Apollo Management, said this month at a conference for The Deal, a magazine.
Well, yes, Mr. Black. The credit market did change; there is no question about that. But that doesn’t explain how private equity firms, whose entire business is premised on accurately forecasting a business’s potential and risk, called it wrong.
It is almost laughable to hear the buyers of Home Depot’s supply unit contend that the housing market’s slump caused the business to deteriorate so far beyond their expectations that they had to renegotiate the deal they struck just months earlier. If the buyers didn’t see that coming — if that possibility wasn’t baked into the firms’ models — then shame on them.
The same goes for J. Christopher Flowers and his effort to wiggle out of his acquisition of Sallie Mae. It is implausible that such a smart guy did not contemplate the possibility that federal legislation affecting Sallie Mae — some of which had already been introduced — might complicate the buyout.
And then there was the aborted deal by Kohlberg Kravis Roberts and Goldman Sachs for Harman International Industries. Five months after they agreed to the deal, the firms said that Harman’s business had fallen off a cliff. This may have been the most valid of the broken deals because Harman broke certain conditions of the transaction, but it still raises the question: Unless Harman misled them — and no one has publicly claimed that — how did these blue-chip firms miss the forecast that much?
Private equity investors — known as limited partners — have been quietly applauding the firms’ attempts to squirm out of potentially bad deals. And it is the firms’ fiduciary duty to return the highest dollar for their investors, which might argue for walking away. The advent of the reverse breakup fee, which limits the amount of money a firm has to pay to walk away, also provides buyout firms with a relatively cheap means of escape.
BUT investors in private equity firms should still be asking why firms made some of these deals in the first place. When debt was cheap, the game was easy; everything was a good investment. But private equity investors are paying for better judgment than that. After all, most of these firms charge “success fees” for acquiring a business, in part to pay for their hard work identifying, studying and winning an auction. (A perverse incentive, I know.)
So what’s the upshot?
If broken deals haven’t hurt these firms’ reputations yet, they should. The broken deals will also dent their wallets, which may hurt more. Other fallout is sure to come. Sellers to buyout firms are going to demand higher premiums — they are already under pressure from shareholders to do so — and prohibitively high breakup fees. Contracts may be written even tighter, but they are already tight.
Despite all of this, private equity firms seem to believe they have plenty of wiggle room. In many of the recently broken deals, they appear to have relied on litigation threats rather than contractual language when telling sellers they planned to back out.
As the law firm Weil Gotshal & Manges recently noted in a briefing to clients, “even a weak, but plausible” argument that a material financial change has occurred “may provide a buyer with significant leverage in renegotiating a deal.”
All of this is going to make outsize returns even harder to come by, at least until everyone has forgotten the lessons. As Mr. Black put it in his recent conference speech, “History has taught us that Wall Street has no institutional memory.”

Friday, November 09, 2007

The $1 Trillion M&A Bloodbath

November 9, 2007, 8:59 am
Posted by Dana Cimilluca,
How big will things get in the M&A market?
There seems to be a consensus shaping up among mergers-and-acquisitions bankers that deal making volume next year will fall by something on the order of 20% because of the turmoil in global financial markets. Reuters yesterday spoke to a number of prominent bankers, and they point to a 20% decline in the U.S. and something more moderate elsewhere in the world. One of them, Stefan Selig of Bank of America, predicts that could put overall activity in 2008 back to where it was in 2005.
Not so bad right? 2005 was a pretty robust year, with nearly $3 trillion of deals struck worldwide. But looked at another way, the picture isn’t so pretty. With 2007 already crossing the $4 trillion mark, a retreat to 2005 levels would mean the loss of more than $1 trillion of deal flow. Based on a very rough calculation of how much the average deal yields in fees, that means investment banks would have to find $5 billion in revenue elsewhere.
And that is not a very attractive prospect given the horrifying performance right now of other Wall Street businesses like fixed-income trading.

Thursday, November 08, 2007

Private Equity’s Fund-Raising Gusher

Deal Journal -, November 8, 2007, 7:30 am
Private Equity’s Fund-Raising Gusher
Posted by Tennille Tracy
U.S. private-equity firms may not be doing a whole lot of deals these days, but that isn’t stopping them from raising more money.
PE firms have set a fund-raising record this year, pulling in a total of $263 billion, according to sister publication Private Equity Analyst, up from $258 billion raised last year. With nearly two months left in the year, there is a chance they could surpass $300 billion.
It might seem an odd time for private-equitiy firms to set a fund-raising record. After all, the debt markets have curbed new buyout activity. Buyout shops announced just $8.5 billion of new deals in October, roughly a fifth of the $42.2 billion a year earlier, according to Dealogic. Then, there are those pesky economists who lately have been warning of the possibility of recession, which would threaten the health of existing PE-backed companies.
Amid such a cloudy environment, Deal Journal can’t help but wonder: Just what would it take to shut off the fund-raising spigot? U.S. institutional investors are smitten with private-equity funds, while Chinese and Middle Eastern sovereign funds have started to pile on as well. They show no signs of stopping.
Is its possible that private-equity fund managers themselves might one day need to exercise some restraint and raise smaller funds? Perhaps, but we aren’t holding our breath.

Wednesday, November 07, 2007

SEC head says looking at disclosure of banks

Wed Nov 7, 2007 1:21am EST
TOKYO (Reuters) - The U.S. Securities and Exchange Commission is looking at whether or not U.S. banks exercised proper disclosure when announcing their investments in subprime-mortgage products, SEC Chairman Christopher Cox said on Wednesday.
The SEC was also continuing to investigate the role of ratings agencies in the subprime crisis, but has yet to determine where "next to head", Cox said.
Cox, in Tokyo to participate in a conference of financial regulators, told a group of reporters the SEC, along with other agencies, was trying to determine if banks had practiced sufficient disclosure about subprime investments.
The SEC has said it is investigating whether credit-rating firms were unduly influenced by issuers and underwriters of products related to subprime mortgages.
Credit rating agencies have been criticized for not responding quickly enough to deteriorating conditions in the subprime market.
They have also been accused of conducting weak analyses and granting higher ratings because they are paid by the firms whose securities they rate.
The SEC began examining credit rating firms under a 2006 law that gives the SEC more oversight of the industry.

Whistling Past the Credit Crunch

NYT DealBook, November 6, 2007
Small can be beautiful too.
The seizing up of the credit markets has led to a big decline in multibillion-dollar mergers and acquisitions. The drop has been most extreme in leveraged buyouts, which relied on cheap debt that all but disappeared, or at least became a lot more expensive. But at the smaller end of the deal spectrum, where transaction prices are in the hundreds of millions or even lower, and in certain regions of the world, such as Asia, it seems that life, and deals, go on.
M&A International, an alliance of 42 merger advisory and investment banking firms around the world, conducted a survey of its members in late September and early October. It asked these bankers, most of whom advise on deals with price tags below $250 million, about the fallout from the credit crunch.
The responses suggest that it has had only been a modest drag on transactions in the so-called middle market, made up of smaller deals that generally don’t make for splashy headlines.
Slightly more than half of the respondents said they hadn’t seen any effect on deal activity in their part of the market, M&A International said Tuesday in a summary of the survey.
Why wouldn’t smaller deals be feeling the pinch? One reason may be that private equity deals were never such a driving force to begin with in these kinds of transactions. In the words of one anonymous respondent: “Our deals are mid-sized to smallish and both our active and prospective deals involve strategic buyers who do not expect to encounter funding difficulties.”
M&A International also said that bankers in Asia generally reported feeling insulated from the turmoil in the United States credit markets — at least for now.
Go to M&A International’s Web Site »

Thursday, November 01, 2007

Quantifying the Private-Equity Slowdown

November 1, 2007, 7:30 am
DealJournal -
Posted by Stephen Grocer
Are corporate buyers filling the deal-making void left by private-equity firms?
From the moment the first cracks in the leveraged-buyout-financing wall began to show, corporate buyers were expected to rule the day. The theory went that with buyout firms forced to the sidelines by the credit crunch that turned off the spigot of cheap financing, corporate buyers would be in the clear to win auctions that their private-equity rivals had previously been winning.
Yet in the first two months of the credit crunch that theory didn’t seem to hold. As the M&A bubble burst in August and September, not only did private-equity players shrink from deal making, so too did strategic buyers (though not quite as drastically as their buyout brethren).
That seems to have changed in October, according to data from Dealogic. Deal volume rebounded in the month, suggesting that the bottom of the trough may have been hit. Global deal volume in October (all data are through Oct. 30) hit $318 billion, a 39% and 44% increase from the full month totals of August and September, respectively, according to the data.
Yet in contrast to August and September, when both corporate and private-equity deal volume fell, October’s uptick was driven by corporate buyers while private-equity deal making continued to dry up. In fact, private-equity firms struck just $17.4 billion of deals last month, compared with the $20.3 billion of August and the $25.1 billion of September.
Need more proof of the slow down in private-equity deal making? LBOs accounted for just 5% of October’s overall deal volume. Compare that with June, when private-equity-led buyouts accounted for 31% of global M&A activity.
Here’s a look are few more interesting numbers on the slowdown in private-equity deal making:
$17.4 billionGlobal LBO volume for the month of October, the lowest total since November 2002.
$393 millionU.S. private-equity deal volume for the week of Sept. 30 through Oct. 6, the slowest week since March 6 through March 12, 2005.
$680 billionLBO deal volume through July 15 of this year
$90 billionLBO volume since July 15
3Number of months since a private-equity firm announced a deal greater than $10 billion.

Tuesday, October 30, 2007

Has the M&A Market Hit Bottom?

October 29, 2007, 3:52 pm
Posted by Dana Cimilluca, DealJournal -

M&A bankers can start crawling out from under their rocks.
The credit squeeze this summer put the M&A market in a deep freeze, and sent bankers running for cover. The volume of announced U.S. deals plummeted to $53.7 billion in September, according to data compiled by Thomson Financial. That is down nearly 80% from the $250.8 billion of deals struck at the height of the deal boom in May, courtesy of a leveraged-buyout surge fueled by the cheap credit then coursing through the veins of world financial markets.
With October ending in two days and the books closed on the final Merger Monday of the month today, it looks as if a rebound could be underway. In October, U.S. companies have struck $73.6 billion of takeovers, up 37% from last month, according to Thomson.
World-wide, a similar uptick is observed. After plunging 65% to $197.8 billion in September from May, global M&A volume has ticked up to $263 billion this month, the data show.
Caveats and caution flags abound. For one, the totals include Oracle’s $6.3 billion bid for BEA Systems this month. The offer has been rebuffed and may ultimately come to naught. And with jitters in the credit markets persisting, the jury is still out on whether we are in a temporary thaw before an even deeper deal freeze.
Still, should the upticks turn into a trend, bankers may come to remember this October more fondly than anyone outside of Red Sox fans.

Thursday, October 25, 2007

A Battle Over Funding for Small Businesses

Representative Jason Altmire, a Pennsylvania Democrat, says he was just trying to help the small technology companies blossoming in his district, just north of Pittsburgh.
So when two of his constituents argued that small businesses should be able to qualify for federal research grants without being penalized for accepting venture capital money, he agreed to introduce legislation that would help them.
His bill, the Small Business Expansion Act of 2007, sailed through the Small Business Committee and then the full House of Representatives on a 325-to-73 vote last month. But the House adopted an important change as the measure came up for a vote — it specified that a small business could not give up an ownership stake of “50 percent or more” to a venture capital firm.
The amendment was meant to satisfy critics, among them officials of the Small Business Administration who argued that allowing venture capitalists to pour unlimited amounts of money into these fledgling businesses would fundamentally alter the concept of a small — and independent — business.
But as the legislation awaits Senate action, opponents argue that the amendment did not resolve their concerns. The S.B.A., they say, has long had discretion in determining whether venture capital’s support of a small business represents an investment or whether it crosses the line into control of the company. The legislation, they say, takes away that discretion by spelling out a particular percentage.
In addition, the critics say they fear that the bill will clear the way for venture capital firms to use their investment to take a controlling stake, giving them the potential to masquerade as small firms and tap into billions of dollars in federal research grants and contracts.
That is an important and sensitive argument at a time when the government has been criticized for awarding contracts to large corporations operating under the guise of small businesses. Edsel M. Brown Jr., assistant director for S.B.A.’s office of technology, said the legislation was unnecessary because “a venture capital company already can invest more than 49 percent as long as it doesn’t have ownership and control.”
The White House also opposes the measure. “The provision would allow large businesses, not-for-profit organizations, and colleges and universities,” a White House statement said, “to own and control small businesses and benefit from programs designed for independent small businesses.”
Quite the contrary, Representative Altmire insists, saying that his bill “does not favor any small business over another, but it also does not automatically disqualify a small business either.”
He argues that the legislation is needed because many tech start-ups are “told by the Small Business Administration that they are ineligible for government money because they got venture capital money — and that doesn’t make any sense.”
Go to Article from The New York Times »

Two Tax Proposals Target Wealthy Fund Managers

The House's leading Democratic tax writer said he will propose a $48 billion tax increase on executives of hedge funds and private-equity firms to help pay for curbing the alternative minimum tax this year.
Go to Article from Bloomberg News»
Go to Article from The Wall Street Journal»
Go to Article from The New York Times»

Wednesday, October 24, 2007

Shareholders Reject Cablevision Deal

Shareholders on Wednesday unplugged the Dolan family’s $10.6 billion bid for Cablevision Systems.
The investor vote leaves Cablevision as an independent company and spells an end, for now, to two years of takeover efforts by the Dolans. Though Cablevision did not provide a breakdown of the vote, large shareholders, proxy advisory firms and analysts had expressed strong reservations about the offer.
Cablevision’s largest outside shareholder, the hedge fund ClearBridge Advisors, and the fund manager Mario Gabelli both opposed the buyout offer, saying the price was too low. Mr. Gabelli went even further, filing notice that he planned to exercise his shareholder appraisal rights, which allow a Delaware court to determine the fair value of his shares.
For their part, despite the latest and most definitive setback they have faced, the Dolans said they remain confident in the company’s future.
“While we are disappointed that shareholders did not approve the transaction, there is really nothing negative about today’s outcome,” the family’s two leading members, Charles Dolan and James Dolan, said in a statement. “We see today’s outcome as a vote of confidence in the prospects of Cablevision, its management team, its 20,000 employees and the industry’s future.”
Go to Cablevision Press Release »

Cisco Goes WiMax With Navini Deal

Cisco Systems has finally put its weight squarely behind WiMax wireless broadband technology, announcing on Tuesday a $330 million agreement to buy the privately held Navini Networks.
Dallas-based Navini, founded in 2000, is a leading developer of technologies that improve the performance of WiMax services and that can cut the capital and operational expenditures for service providers by as much as 50 percent, Cisco said.
WiMax, which stands for Worldwide Interoperability for Microwave Access, is a wireless broadband technology that can travel over much greater distances than Wi-Fi.
The deal marks a decent exit for Navini’s many venture capital backers, which poured roughly $200 million into the startup over six rounds. Backers include Austin Ventures; Acapita Ventures, the venture capital arm of Arcapita Bank; Scottwood Capital; Granite Ventures; Investor Growth Capital; Lehman Brothers Venture Partners; Sternhill Partners; Intel Corp.’s Intel Capital and Motorola Ventures, the corporate V.C. arm of Motorola.
Go to Article from The »

Monday, October 22, 2007

The Gloomsayers Should Look Up

In his weekly column in The New York Times, Ben Stein argues that while the economy is basically in good shape, the current problems in the credit market can be squarely laid at the door of the investment banking chieftains.
Go to Article from The New York Times»

Tuesday, October 16, 2007

Tech Companies Ramp Up M&A

Technology companies have ramped up their M&A spending in the last six weeks, and one survey suggests they are just getting started. The 451 Group polled corporate development professionals at actively acquiring companies, and more than 80 percent of them said they planned to maintain or increase their level of M&A in the next year.

Go to Report from The 451 Group»

Thursday, October 11, 2007

Private Equity Is on Pace for Record Fund-Raising Year

Posted by Deal Journal on
Keenan Skelly of Dow Jones Newsletters files this report on fund-raising by private-equity firms.
While trouble in the credit markets led to a pronounced slowdown in buyout deal-making in the third quarter, no corresponding decline has been seen in fund-raising.
Through the third quarter of this year, $199.4 billion has been raised by 295 U.S. private-equity firms, well ahead of the $154.1 billion collected by 232 firms in the year-earlier period, according to data collected by Private Equity Analyst, an industry newsletter published by Dow Jones & Co. The figure is $60 billion ahead of where the industry was at the midpoint of the year.
The data encompass funds raised by buyout, venture capital, and other types of private-equity firms.
With such firms as Apollo Management, the Carlyle Group and Warburg Pincus still in the market raising funds of $10 billion or more each, the tally looks likely to continue rising rapidly through year end, meaning U.S. fund-raising could well break 2006’s record total of $254 billion.
The continued strength is in part a reflection of the fact that it takes time for limited partners and general partners alike to adjust to new circumstances in their markets. It also is driven by the recognition by many LPs that private equity is a long-term investment, and that consistently committing capital to the asset class over time – and not just when market conditions are good – is likely the best way to generate strong returns.
The buyout category continues to dominate, with 132 buyout funds raising $155 billion this year, up from $100.7 billion raised by 96 shops at this point in 2006. Strong fund-raising by firms looking to take advantage of distressed opportunities is a big part of the 2007 picture, with such funds accounting for $29.6 billion of the total raised this year. Distressed firms had already raised a record sum by July of this year.
On the venture-capital side, fund-raising continues to be sluggish. A total of 102 U.S. venture firms have raised $18.8 billion this year, down from $21.3 billion raised by 89 firms in the year-ago period.
In Europe as in the U.S., fund-raising totals remain on track for a record. Through the first nine months of the year, 116 European private equity firms raised a total of $73.1 billion, ahead of the $68.6 billion that 114 funds had raised at this point in 2006. The record for Europe of $100.8 billion was set last year.

Wednesday, October 10, 2007

Plaintiffs Face Skeptical Court in Key Fraud Case

With Chief Justice John G. Roberts Jr. taking the lead in arguments in the Stoneridge case -- one of the most closely watched business cases in years -- the Supreme Court appeared strongly inclined to leave it to Congress to define the circumstances under which secondary players like investment banks, auditors and vendors can be sued in private securities fraud actions. Go to Article from The New York Times»

Tuesday, October 09, 2007

Justices to Consider the Liability of Bankers, Vendors

Submitted by: Ted Allen, RiskMetrics Group - Risk & Governance blog:

The U.S. Supreme Court will hear arguments today in Stoneridge Investment Partners v. Scientific-Atlanta, a high-profile case that concerns the liability of bankers, vendors, and other third parties who help companies commit securities fraud.
The Stoneridge case stems from claims by shareholders of Charter Communications against Motorola and Scientific-Atlanta, which manufactured set-top boxes used by Charter’s cable television subscribers. The investors allege that the two vendors engaged in “wash” transactions in 2000 to help Charter meet its annual operating cash flow goals.
The closely watched case, which one industry group has called “the most important case in a generation,” has attracted 30 amicus briefs from investor advocates, state officials, and industry groups.
The Council of Institutional Investors, the North American Securities Administrators Association, the University of California, the New York State Teachers’ Retirement System, the Change to Win labor federation, and 30 state attorneys general have filed briefs in support of investors. The Bush administration disregarded the recommendation of the Securities and Exchange Commission and filed a brief in support of the Charter vendors.
While the Supreme Court previously barred suits against “aiders and abettors” in its 1994 Central Bank of Denver decision, the Charter investors argue that they should be able to bring “scheme liability” claims against vendors, bankers, and others who knowingly participate in transactions that help companies mislead shareholders, even if the third parties didn’t publicly mislead anyone. Billions of dollars may be at stake in the case, as the high court’s decision likely will have far-reaching implications and affect the ability of Enron investors to pursue a class lawsuit against the company’s former investment banks.
On Sept. 20, the Supreme Court announced that Chief Justice John Roberts would take part in the court’s deliberations in Stoneridge. Roberts, along with Justice Stephen Breyer, earlier recused himself from the high court’s decision on whether to hear the case. Both justices reported in their 2006 financial disclosure forms that they own shares in Cisco Systems, the parent of Scientific-Atlanta, Legal Times reported. The Supreme Court did not disclose the basis for the chief justice’s decision to rejoin the case.
Roberts’ participation in the case presumably will help the defendants. During the past year, the chief justice joined court majorities in several rulings that favored business interests.

Sallie Mae Sues to Force a Buyout

Published: October 9, 2007, The New York Times

The SLM Corporation, parent of the student lender Sallie Mae, filed a lawsuit yesterday against a group of firms that had agreed to buy it for $25 billion but now are trying to renegotiate the deal.
The suit, filed last night in Delaware Chancery Court, comes one day ahead of a self-imposed deadline by the buyers to reach a new agreement. Failing that, the buyers — the private equity firms J. C. Flowers & Company and Friedman Fleischer & Lowe and the banks JPMorgan Chase and Bank of America — were prepared to walk away. Under the terms of the deal negotiated in April, the firms would pay a $900 million breakup fee.
The lawsuit is the harshest turn yet in one of the most bitter buyout fights this year. Buyers in other deals have clashed privately with their targets over price and terms of the acquisitions, but Sallie Mae and its suitors have been unafraid to slug it out in public.

Friday, October 05, 2007

Open Season on American Companies

WSJ.COM/DealJournal, October 4, 2007, 1:05 pm:

U.S. voters are getting increasingly nervous about free trade, reports this most recent edition of the WSJ-NBC News Poll. Here’s another reason for them to pay notice.
It turns out 2007 is shaping up as the most-active year for foreign acquisitions into the U.S. since 1990, according to recently released statistics from Thomson Financial. Seventeen years ago, there were jitters about Japanese buyers scooping up American icons from Rockefeller Center to Columbia Pictures.
Today, the list of buyers is incredibly diverse, with English, Russian, German, Chinese and Finnish companies getting into the mix.
In all, foreign buyers were responsible for more than 21% of U.S. acquisitions this year, a total of $275 billion of the record-setting $1.3 trillion in overall deals. Since 1990 — when the foreign buyers accounted for 28% of the M&A world — the percentage has fluctuated largely in the teens. See what effects this has had in New England, via this Boston Globe story.
There are a series of mixed political and economic messages in these numbers: The first is that the weakening U.S. dollar is creating a ripe opportunity for buyers around the world. The past week alone, for instance, has seen Canada’s TD Bank spend $8.5 billion on Commerce Bank and Finland’s Nokia Oyj buy digital map maker firm Navteq Corp. for roughly $8 billion.
Is this good or bad for the U.S. economy? There’s a thesis in this question. We’ll try to sum it up in two paragraphs.
It’s positive in that American companies continue to attract the best capital from around the world. This preumably keeps the American economy in its dynamic state, which is essential to overall growth and wealth creation. Want to see what happens when global capital dries up? Take a look at Asia after the currency crisis about 10 years ago.
Yet there’s understandably a worry underneath these investments. From a political standpoint, might a backlash against investments into the U.S. push the U.S. government to install its own trade roadblocks — thus blocking off U.S. capital from foreign markets? Even more important is the dilemma of our own economic habits: Are our trade imbalances so great that we’ve set up the seeds for our own cherry-picking?

Venture Capital's Hidden Calamity, October 3, 2007, 12:01AM EST :

A closer look at otherwise strong investment growth shows many firms are getting all the drawbacks of a hot market, with few of the benefits. by Sarah Lacy

This is a bad time to be a venture capitalist. Anyone who says different is raising a new fund—or works at one of the few firms having a good year.
Sure, the numbers look great on the surface. The value of deals rose a solid, yet not bubbly, 8% in the second quarter, with investors pumping $7.4 billion into emerging companies, according to Dow Jones VentureOne. And the money is funding some legitimately exciting frontiers, including Web 2.0, which attracted $500 million in the first half. Companies specializing in clean tech got $1.1 billion in the same period.
Initial public offerings are up for the year, too. In the second quarter, venture-backed companies tapped the public markets for $2.73 billion, the most raised in a three-month period since the go-go days of 2000. And researchers expect the current period to be another banner quarter, with a whopping 46 companies looking to file.
IPOs and Acquisitions Tell a Different Story
But a closer look at the numbers reveals some disturbing trends. Consider IPOs. Most of the initial share sales getting done are mainly one-off companies that were founded years ago and have slogged away at building solid businesses for a half-decade or more. This year's biggest hits were MetroPCS (PCS) of Dallas and EMC's (EMC) spin-out of VMware (VMW)—hardly your classic Silicon Valley startups. There's simply no big overall tech movement getting Wall Street revved up, and among entrepreneurs, the feeling is mutual. Sarbanes Oxley and other regulations have made the prospect of going public far less appealing.
The picture looks worse among acquisitions. Sure, the usually sleepy third quarter saw $10 billion come in acquisition proceeds, but that was spread among 90 deals. Companies like TellMe, the voice recognition software company founded in the late 1990s that snagged $800 million from Microsoft (MSFT), are in the minority this year. Far more common is the tech company that plodded along for more than six years, chewing through some $30 million in venture cash to eventually get bought for $50 million or so. Indeed, the median length of time it took companies to get bought was the longest Dow Jones VentureOne has seen since it started measuring the industry 20 years ago. Meanwhile, valuations keep rising, as billions of dollars in VCs’ coffers fight to get in what few great companies are out there.

Thursday, October 04, 2007

Time for a New Corporate Buying Spree?, October 3, 2007, 3:57PM EST
As earnings take a nosedive, analysts expect to see more companies turn to M&A to pick up the slack. They certainly have the cash. by Steve Rosenbush

The slowdown in U.S. corporate profits has been swift and stunning. While earnings for companies in the Standard & Poor's 500-stock index grew a robust 14.7% in 2006, profit growth has screeched to a halt amid the troubled financial climate of 2007. With the income-reporting season kicking off the week of Oct. 8, average earnings for the S&P 500 companies are on track to grow just 1.9% during the third quarter, the slowest pace in more than five years, according to senior S&P index analyst Howard Silverblatt. That's down from 7.9% for the first quarter and 9.6% in the second. (S&P, like BusinessWeek, is a unit of The McGraw-Hill Companies (MHP).)
The slowdown creates a dilemma for corporations, which face an imperative to "grow or die," Silverblatt says. How will they address their profit-growth problem? Many experts believe they will increasingly turn to mergers and acquisitions. "I don't think there's any question that growth will be harder to come by and that many companies will attempt to compensate for that by using M&A," says Hal Ritch, the former co-head of M&A at Citi (C); Donaldson, Lufkin & Jenrette; and Credit Suisse (CS), which acquired DLJ. He's now co-CEO of Sagent Advisors, an M&A advisory shop.
Ritch and other M&A advisers say they have detected a shift in their business during the last few months. The private equity firms that dominated M&A last year and during the first half of 2007 have been doing fewer deals of late. They are having a tougher time securing funding (, 9/17/07).

Wednesday, October 03, 2007

Leveraged Buyout Bust By-Product: Lawsuits Blog

Here is some good stuff from the D&O Diary Blog: As credit market disruption has reached the leveraged buyout world, a number of deals announced earlier this year to great fanfare have been unceremoniously snuffed, while others are on life support. Not too surprisingly, one direct result from this deal derailment has been a spate of lawsuits, as jilted partners and disappointed investors cast blame and seek to recoup their lost expectancy.
The most interesting of these litigation developments is the securities class action lawsuit that a Harman International Industries shareholder filed on October 1, 2007 against the company and three of its officers and directors. (Here is the complaint and the plaintiffs’ lawyers’ press release.) The Harman International lawsuit filing follows hard on the heels of the company’s September 21, 2007 announcement that its erstwhile acquirers, Kohlberg Kravis Roberts and a Goldman Sachs investment fund, had informed the company that they "no longer intend to complete the previously announced acquisition" of the company, and that they "believe a material adverse change in Harman’s business has occurred." Here is a Wall Street Journal’s article discussing the cancellation of the $8 billion deal.
The lawsuit, filed on behalf of shareholders who bought the company’s stock between the time of the company’s April 26, 2007 merger announcement and the September 24 cancellation announcement, alleges among other things that the company failed to disclose that it had breached the merger agreement; that it had R & D and other capital expenses, as well as inventory levels, above disclosed amounts; and that its relationship with a key customer had deteriorated. The complaint further alleges that Harman’s Chairman and controlling shareholder "had a strong personal motive" for the completion of the merger, from which he would received proceeds of $420 million. The implication is that the company withheld the true information to ensure that the merger would be completed, and that the merger fell apart only when the misrepresentations came to light.
In addition to the possibility of shareholder lawsuits, it may also be anticipated that other disappointed targets will sue their former suitors for breach of contract. The current dustup between Genesco and Finish Line provides an example of what this kind of dispute looks like. On June 18, 2007, Finish Line announced that it would be acquiring Genesco in a transaction valued at approximately $1.5 billion. But something happened on the way to the altar; on September 21, 2007, Genesco sued Finish Line in Tennessee state court seeking an order requiring Finish Line to complete the merger and forcing UBS to fulfill its agreement to finance the deal. Here is a article describing the parties’ dispute and the Genesco lawsuit.
Finish Line, in turn, has filed a counterclaim asking the court, according to news reports, to compel Genesco to "provide information related to their proposed merger or else rule that a materially adverse event has occurred."
To my knowledge, no lawsuit has yet arisen in connection with the other very prominent deal in which the would-be acquirer invoked the "material adverse change" clause to cancel a deal – that would be the $25 billion deal to take over SLM Corp. (better known as Sallie Mae) that J.C. Flowers cancelled last week. Here is a Wall Street Journal article discussing the kibosh put on the Sallie Mae deal. But while there is no lawsuit yet, Sallie Mae did issue a September 26th press release saying that "the buyer group has no contractual basis to repudiate its obligations under the merger agreement and intends to pursue all remedies available to the fullest extent of the law." While there apparently remains some hope that the Sallie Mae deal might be salvaged, Sallie Mae yesterday rejected the would-be buyers latest reduced offer. If the deal dies altogether, keep an eye out for a lawsuit -- by somebody against somebody else.
It seems like only yesterday that the business pages were full of stories about increasing numbers of ever-larger buyout bids. Now the papers are covering the same deals as they fall apart. As the Journal noted, the termination of the Harman deal "represents a severe setback for the overall deal market as it tries to close upward of $350 billion of leveraged buyouts amid tightening credit conditions." If buyers’ remorse or tight credit undermines more deals, the disappointed targets can be expected to launch lawyers. Chances are that the lawsuits will live on long after the buyout bubble has become a distant memory. Posted by broc at October 3, 2007 08:06 AM

Monday, October 01, 2007

A Parched Month Ends on Hopeful Note

WSJ DealBook, September 28, 2007, 1:13 pm

A few months ago, at the peak of the buyout boom, a $2 billion transaction could have easily slipped under the radar. These days, it is, literally, a big deal.
Case in point is 3Com, which said Friday that it will be taken private by Bain Capital for $2.2 billion. That single announcement accounted for about 11 percent of the world’s buyout volume during the entire month of September, according to data from Dealogic. It was about 16 percent of buyouts in the United States. That gives you an idea how slow this month has been.
Private equity firms rely on borrowed money to fund their acquisitions. After a long period of easy access to credit, buyout firms hit a wall this summer when the debt markets pulled back. The result was a dramatic decline in private equity deals, especially those with big price tags.
It remains to be seen whether 3Com is an isolated event or a sign that the drought of private equity deals is breaking. On Thursday, the banks financing the buyout of First Data — a deal that came before the credit crunch — were able to sell a larger-than-expected amount of loans related to the transaction, which is also a potentially positive sign.
Before the 3Com buyout was announced, Dealogic calculated that global buyout volume in September was about $17.6 billion. In September 2006, a single buyout — that of Freescale Semiconductor — was worth just as much. For all of September 2006, the figure was $57.5 billion, more than three times this September’s total.
The dropoff was similar for private equity activity in the United States, where buyout activity came to $11.4 billion in September (excluding 3Com), compared with $31.7 billion a year ago.
Dealogic also published preliminary third-quarter data, which indicated that overall merger activity — as opposed to just buyouts — actually rose from a year ago. It reported Friday that global announced mergers came to $992 billion in the latest quarter, 24 percent more than the same period a year ago (but down 43 percent from a very busy second quarter).
Go to Article from The Financial Times »
Go to Related Item from DealBook »

Thursday, September 27, 2007

Private-Equity Firms: Job Creation Machines?

Deal Journal -
September 27, 2007, 10:48 am
Posted by Stephen Grocer
Do private-equity firms create jobs? It’s an essential point as the buyout kings get deeper into the economy and the U.S. Congress gets more eager to tax their pay.
The answer — at least for the most succesful private-equity owned firms — is yes. Accountancy Ernst & Young conducted the new study, examining 100 biggest sales of private-equity portfolio companies in the U.S. and Western Europe in 2006.
Ernst & Young found that the average enterprise value of the companies studied in both Europe and U.S. jumped more than 80% from the time they were acquired. The growth in enterprise value was driven in part by the fact that private-equity-owned companies achieved faster profit growth, two-thirds of which came from business expansion — while a third in Europe — and 23% came from cost reductions.
What does that mean for jobs? The study found that employment was at the same or higher level at the time of exit in 80% of U.S. buyouts and 60% of European buyouts. In the United Kingdom, France and Germany, where fears that the industry will slash jobs has spurred strong opposition and scathing criticism, employment at businesses owned by private-equity firms rose 5% annually. That compares to 3% for equivalent publicly traded companies.
And the performance of the company remains strong after private-equity exits the business.
The study could be used to challenge arguments by private-equity opponents: namely that buyout firms slice up companies and slash jobs all to fatten the wallets of their limited partners. Of course, the study is highly self-selecting, as it identifies what are essentially the most successful deals, not the ones that fail.
Still, the conclusions do get to an interesting point: Whether private-equity firms are better managers than others.
“I think it has been proven that IPOs of private-equity-backed companies perform better post-IPO than comparable companies not backed by private equity,” says John O’Neill, America’s director of private equity with Ernst & Young. “That’s because of their laser-like focus on improving the business and working very closely with management and the board that allows them to jump on things very quickly and make the business better.”

Wednesday, September 26, 2007

Sallie Mae CEO’s Counterattack Against Waffling LBO Buyers

WSJ DealJournal, September 26, 2007:
Sallie Mae is the odds-on favorite to be the next deal after Harman and Genesco where the buyers try to slip away scot-free by arguing that a so-called Material Adverse Change has occurred to the business. The Sallie Mae buyers — private-equity firm J.C. Flowers & Co. as well as Bank of America and J.P. Morgan Chase — already have said education-finance legislation expected to be signed by President Bush may trigger the MAC clause in their merger agreement with SLM, the student lender’s parent.
With SLM saying last week, effectively, that a deal is a deal, if Flowers & Co. call a MAC — as many in the deal community expect they will — the parties could be headed to court (likely the Delaware Chancery Court, according to this post from Steven Davidoff from M&A Law Prof. Blog). That would be the biggest such deal ever to land there.
Here’s the key part: We spoke to someone who is familiar with the thinking of SLM Chairman Albert Lord, who is said by people who know him to be combative and competitive. He is expected to argue the following points: 1) Disclosures in the company’s 10-K annual filing with the SEC about possible legislation prevent the buyers from calling a MAC; and 2) Flowers sung the deal’s praises to potential equity partners after agreeing to the deal, and after it became clear that the legislation would be worse for the company than previously expected. How could he do that and at the same time argue that a material adverse change has occurred, the argument goes.
The Flowers camp won’t comment publicly. Privately they argue that the MAC clause in the deal does allow for an out if legislation for the industry is worse than what’s contemplated in the 10-K.
Of course, the two sides ultimately could settle their differences quietly and agree to a lower price for the deal. BofA chief Ken Lewis signaled that is what his bank wants in this interview published today in the Charlotte Observer.
At stake is the $900 million reverse break-up fee the buyers are on the hook for if they want to walk and can’t prove a MAC — and that will buy a lot of fireworks.

Strategics Return to M&A Market

from Corporate Dealmaker Forum by Basdeo Hiralal

Strategic buyers are returning to the market in force after being outbid and crowded out by private equity buyers since 2004. However, strategic buyers will be more selective than private equity buyers and won’t pay the premiums and multiples that sellers have come to expect. Moreover, strategic transactions will be considerably smaller than the megadeals announced during the boom years.
Low interest rates, great liquidity and rising asset values fueled the greatest mergers and acquisition boom in history, with approximately $11.4 trillion in announced transactions on a worldwide basis since the beginning of 2004 (see table). Private equity accounted for a large percentage of these transactions. The credit crisis that developed in the summer of 2007 sharply reduced the number of private equity deals and the volume of M&A activity (see table).
Historically, sellers faced a trade-off between private equity and strategic buyers. Private equity buyers traditionally offered sellers a lower bid, but no antitrust risk of a delay or challenge by a competition agency in the U.S. or abroad. Strategic buyers, in contrast, traditionally offered a higher bid than private equity by sharing some of the synergies of a proposed transaction with the seller. That premium, however, was sometimes accompanied by antitrust risk. Over the last couple of years, private equity buyers were able to offer sellers both higher prices and no antitrust risk, effectively trumping strategic buyers and largely crowding them out of the market.
This dynamic has now changed. Most significantly, the credit crisis has restricted the availability of capital and raised uncertainty in the credit markets. Second, some private equity buyers also now present antitrust risk due to prior acquisitions.
We expect to see consolidation in the energy, steel, chemicals, pharmaceutical and healthcare industries. A number of strategic transactions have been recently announced, including Transocean Inc.-GlobalSantaFe Corp. (offshore drilling rigs); US Steel Corp.-Stelco Inc. (Canadian steelmaker) and Medco Health Solutions Inc.-PolyMedica Corp. (diabetes-care services and products). Bloomberg LP has reported speculation that Arcelor Mittal may bid for Tenaris SA (steel pipe). We see more strategic acquisitions in the pipeline and expect the weak dollar to attract foreign buyers. — Tom Fina
Tom Fina is a partner in the antitrust practice in the Washington office of international law firm Howrey LLP.

Monday, September 24, 2007

M&A Deal Credit Crunches Blog
The Practical Corporate & Securities Law Blog, Broc Romanek and Dave Lynn are Editors of
September 24, 2007

Despite the Fed's reduction in interest rates last week, a number of deals are in trouble and have produced some interesting developments and disclosures. As a result, caselaw regarding MAC clauses and other merger provisions will likely be fleshed out over the next year (remember the September-October issue of the Deal Lawyers print newsletter opens with a related piece: "The 'Downturn' Roadmap: Parsing the Shift in Deal Terms").
Here are some of the notable developments and disclosures:
1. Harman International's Form 8-K (expected soon) - According to this article, late Friday, Goldman Sachs and Kohlberg Kravis Roberts scuttled their pending $8 billion buyout of Harman International after discovering details about Harman that raised concerns about its business. You may recall that this deal was one of the first to introduce "stub equity."
2. Genesco's Form 8-K (filed 9/20/07) - As noted in this article, Genesco is suing to force Finish Line and UBS to complete the deal it made to buy Genesco (here is the Form 8-K regarding the lawsuit filed Friday).
3. Reddy Ice Holding's Proxy Statement (filed 9/12/07) - As noted in this article, Morgan Stanley, the deal's solo underwriting bank, claimed in late August that the financing agreements had been breached and said that it was "reserving its rights." According to the proxy, Morgan Stanley argued that GSO Capital Partners, the buyout's equity sponsor, and a special committee altered some dates in the original deal agreement and, specifically, stretched out the debt marketing period without Morgan Stanley's consent. Morgan Stanley insisted that GSO had breached the debt financing contract by doing that.
4. Accredited Home Lenders Holding Co.'s Form 8-K (filed 9/20/07) - As noted in this article, Accredited Home Lenders compromised on its price tag in order to save its sale to the Lone Star Fund.
5. SLM Corp.'s Additional Soliciting Material (filed 8/7/07) - As noted in this article, Sallie Mae's purchase by a consortium led by JC Flowers & Co. might tank as the buyers are having second thoughts.
Maximizing Value (and Controlling Risk) in Distressed and Special Situations Investing
Join tomorrow for a webcast – “Maximizing Value (and Controlling Risk) in Distressed and Special Situations Investing” – to hear Tim O'Connor of Imperial Capital, and Mark Palmer and Jonathan Gill of Bracewell Giuliani discuss the latest trends and developments regarding the opportunities and strategies available in distressed situations. Given what’s happening in the credit markets – this program is particularly timely!
Coming Soon: On November 1st, join us for the webcast: “Compensation Arrangements for Private Equity Deals.”
Act Now: To catch these programs, try a 2008 no-risk trial to today – and get the "Rest of 2007" at no charge.
Delaware Supreme Court: Rejects Deepening Insolvency Cause of Action
A few weeks ago, the Delaware Supreme Court decided - in Trenwick America Litigation Trust v. Billet, No. 495, 2006 (Del. Aug. 14, 2007) - that no cause of action asserting deepening insolvency exists under Delaware law. Sitting en banc, the court didn't issue its own decision - rather, it relied on the lengthy opinion of Vice Chancellor Strine issued in August of last year, where he looked carefully at the underlying theory (and other available causes of action) and concluded that the deepening insolvency theory was incoherent. We have posted memos regarding this decision in our "Bankruptcy & Reorganization" Practice Area.
- Broc RomanekPosted by broc at 06:42 AMPermalink: Some Notable Credit Crunch Disclosures and Developments...

Tuesday, September 18, 2007

Trouble in the Private Equity Market, September 18, 2007:

That there is much trouble in the private equity market is clear and well-documented. No credit available for signed deals. Private equity partners suing each other. Shareholders suing funds. The troubles will likely continue for some time.
On Sunday, the NY Times ran this column with some interesting remarks from Michael Jensen, professor emeritus at the Harvard Business School, leading scholar in finance and management, and the man whom many consider to be the intellectual father of private equity. Here is an excerpt:
“We are going to see bad deals that have been done that are not publicly known as bad deals yet, we will have scandals, reputations will decline and people are going to be left with a bad taste in their mouths,” Mr. Jensen said in an interview last week. “The whole sector will decline.”
Mr. Jensen was elaborating on the trenchant comments he made last month in a forum on private equity convened by the Academy of Management. There, he excoriated private equity titans who sell stock in their companies to the public — a non sequitur in both language and economics, he said — and warned that industry “innovations,” like deal fees that encourage private equity managers to overpay for companies, will destroy value at these firms, not create it.
He also said that private equity managers who sell overvalued company shares to the public, whether in their own entities or in businesses they have bought and are repeddling, are breaching their duties to those buying the stocks.
“The owners who are selling the equity are in effect giving their word to the market that the equity is really worth what it is being priced at,” he said. “But the attitude on Wall Street is that there is no responsibility to the buyers of the equity on the part of the managers who are doing the selling. And that’s a recipe for nonworkability and value destruction.”